Ministers consider revival of local authority mortgages

The government is paving the way for local authorities to offer low-cost mortgages to first-time buyers and others struggling to obtain loans from traditional lenders who are demanding huge deposits.

The housing minister, Margaret Beckett, is understood to be considering resurrecting schemes last seen in the mid-1970s, when local authorities played a major role in the mortgage market. Officials are exploring schemes that will help buyers shut out of the market by banks and building societies that no longer offer loans above 90% of the value of a home.

One option under consideration is to allow councils to borrow on capital markets, using their triple-A credit rating to raise finance more cheaply than banks can. Councils are currently prohibited from lending below the "standard national rate" of 5.07%, but restrictions may be lifted, enabling them to lend at rates they have negotiated in the money markets.

Local authorities became significant lenders in the 1960s, and during the 1973-1974 "mortgage famine" they played an important role in filling the gap left by building societies in an earlier credit crunch. They typically offered loans of up to 97% of the value of a home, with repayments spread over 25 or 30 years. Mortgages were granted to local people only and targeted areas councils were keen to see regenerated.

A Department of Communities and Local Government spokesman said: "Local authorities have a crucial role to play in dealing with the current economic climate ... Councils already have the power to offer mortgages, if that borrowing is sensible and affordable."

Several councils have been lobbying the government to lift restrictions imposed in the mid-1970s that in effect removed them as a force from the mortgage market. But Treasury officials have resisted council intervention in mortgages unless all other avenues of injecting liquidity into the property market are exhausted.

Chris Leslie, of the New Local Government Network, a policy thinktank, said: "We have been trying to push this concept with government since September. The money could come from the same capital markets the banks use, but using the triple-A rating that local authorities enjoy.

"One reform we are urging is a relaxation of the rules so that local authorities can set their rate of mortgage interest based on the price they have accessed in capital markets."